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A DirecTV technician performs an installation in California.
Patrick T. Fallon / Bloomberg
AT & T’s complex transaction to abandon DirecTV and its other pay-TV businesses has met with generally positive reactions on Wall Street for its strategic intent, but not for its potential financial impact.
Some analysts see the deal as the first step towards a second deal – likely a merger with a satellite competitor
Dish Network.
The downside is that it will weigh on AT & T’s cash flow and earnings in the near term, possibly increasing further pressure on the company’s high dividend.
AT&T stock (ticker: T) was down around 2.2% on Friday, to around $ 28. The S&P 500 index fell 0.2%.
The transaction, announced Thursday night, will see AT&T split its pay-TV operations – which include DirecTV, AT&T TV and U-verse – into a separate entity later this year. There are several moving parts.
AT&T will own 70% of the common shares of the new DirecTV, a stake valued at $ 4.2 billion, and will earn $ 4.3 billion in junior preferred shares with an in-kind return of 6.5%. Private equity firm TPG Capital is paying $ 1.8 billion for 10% first preferred stock in cash and will also get a 30% stake in the entity’s common stock. Finally, the new DirecTV will take $ 6.2 billion in new debt.
Proceeds from the purchase of TPG and the debt issuance will go to AT&T, providing it with $ 7.6 billion in cash up front. The company will use this money to reduce its existing debt.
There are a few more folds: AT&T will be responsible for the first $ 2.5 billion in losses from DirecTV’s NFL Sunday Ticket, the new DirecTV is also assuming $ 200 million in existing AT&T debt, and there are tax implications to disclose. . But by combining it all, AT&T attributes an enterprise value of $ 16.3 billion to the new DirecTV.
“Regarding the value of the transaction, we admit to being confused and overheard by a large number of investors who are also confused; we’re assuming such a confusing presentation is somehow on purpose, ”JP Morgan analyst Phil Cusick wrote on Friday. “Regardless of the stated value of the deal, we think it should suffice to say that AT&T receives ~ $ 7.6 billion in cash up front, keeps 70% of the common stock and gets a good share. medium term cash flow assuming everything. is fine. “
AT&T management said Thursday it expects to receive about $ 1 billion in distributions per year from the new DirecTV from a common stock dividend. But that will depend on DirecTV’s operating results.
With the details of the fallout still somewhat unclear, analysts focused on the long-term and strategic financial implications of the deal for AT&T. Many saw it opening the door to a future merger with Dish (DISH) that could help consolidate the US satellite television industry. AT & T’s 70% stake in the new entity means it could still benefit from it, but separation of AT & T’s core business means it might not face so many evils regulatory head and distraction in a potential transaction.
Dish chairman Charlie Ergen called a DirecTV-Dish combination “inevitable” last fall. This could follow as early as 2022.
Despite the well-known pressures of cord cuts and an exodus of subscribers since AT&T bought DirecTV in 2015 – for about $ 66 billion, debt included – the company has remained profitable in its decline. The company’s video segment generated $ 28.6 billion in revenue, down 11%, and nearly $ 4 billion in EBITDA – or earnings before interest, taxes, depreciation, and amortization – down 12% from compared to 2019. This was about 7% of AT&T’s $ 54.5 billion adjusted EBITDA in 2020, which excludes some one-time costs, including a $ 15.5 billion depreciation – you know. guessed it – DirecTV. AT&T lost around 3.3 million video subscribers last year, ending with just over 17 million.
By splitting it up, AT&T loses DirecTV’s contribution to its earnings and free cash flow, but neither will it feel its revenue decline.
“This structuring feat significantly improves AT & T’s revenue growth profile (to <1%) and retains high exposure to the potential synergies of a merger with DISH, at the cost of a payout ratio. higher dividends and slightly increased net leverage, ”wrote Bernstein analyst Peter Supino on Friday morning.
He calculates a dividend payout ratio of nearly 70% for AT&T after the transaction, and an adjusted net debt to EBITDA ratio of up to 3.6 times. AT & T’s dividend currently earns 7.3% per year.
AT&T also loses Bill Morrow to the new DirecTV entity, of which he will become CEO. Morrow is a longtime telecommunications executive who had been in charge of expense management at AT&T since 2019 and has built a reputation as a “chief cost reducer” – though AT&T CEO, John Stankey, rebutted this characterization during an investor call Thursday night. Stankey highlighted the spin-off’s ability to focus AT&T on growth areas such as 5G, fiber internet and HBO Max.
“It’s a bad financial transaction, in our opinion, but it could be good for the company from a strategic point of view,” wrote
Oppenheimerof
Timothy Horan Friday. “T’s FCF will come under pressure after the deal closes and the dividend could be threatened. T is losing his spending czar to become CEO of the new DTV, but an increased focus on growing companies could help.
AT&T also has an upcoming $ 27 billion wireless spectrum bill to purchase and clear the newly acquired C-Band licenses. Investors and analysts will then hear from the company at an Investor Day on March 12, when management is expected to discuss long-term strategy and may unveil new financial goals.
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